ProShares introduced Thursday (12/09/2010) a new market-neutral absolute return ETF: ProShares RAFI Long/Short (RALS). Its objective is to track a new index, minus the 0.95% expense ratio, from Research Affiliates that equally weights long positions against short positions in a sector neutral manner.
The RALS overview page provides some information on the index, although you will have to go to the RAFI US Equity Long Short Index fact sheet (pdf) on Research Affiliates website to get details. The index backtest shows annualized returns of +2.9% for 5 years (versus +1.0% for the S&P 500), and +7.0% for 10 years (+0.8% for S&P 500). Volatility was much higher than I expected, with the standard deviation at 85% of the S&P for the past 5 years.
The index fact sheet does not detail the strategy’s drawdown during the backtest period or the number of stocks held. The universe of eligible stocks is defined only as “a selection of U.S. domiciled publicly traded companies listed on major exchanges.” However, the Index Construction Rules states the “selection” is limited to the 1000 largest companies by cap-weight and 1000 largest by RAFI weight.
The underlying RAFI US Equity Long Short Index compares the Research Affiliates Fundamental Index (RAFI) weighting methodology to traditional market capitalization (CAP) weighting. It establishes long positions in stocks where the RAFI weight is larger than the CAP weight and short positions where the RAFI weight is smaller than the CAP weight.
The Index reconstitutes annually in March and rebalances monthly. During reconstitution, new long and short positions are selected, weighted, and sector neutralized. The monthly rebalancing provides for equal dollar investments in both long and short positions.
According to the Index tab on the RALS overview page, the five largest long index constituents currently are Bank America (BAC) 2.1%, Verizon Communications (VZ) 1.9%, General Electric (GE) 1.8%, AT&T (T) 1.8%, and Citigroup (C) 1.8%. The five largest short constituents are Schlumberger (SLB) -1.7%, Berkshire Hathaway (BRK.A) -1.5%, Apple Computer (AAPL) -1.4%, Qualcomm (QCOM) -1.2%, and Cisco Systems (CSCO) -1.2%.
The long, short, and net sector weightings, ranked by current net exposure are: Telecommunications (+5.4%, -2.1%, +3.2%), Consumer Staples (+8.4%, -7.0%, +1.4%), Energy (+12.3%, -11.3%, +1.0%), Health Care (10.0%, -9.2%, +0.8%), Industrials (+11.4%, -10.8%, +0.6%), Utilities (+5.8%, -5.5%, +0.4%), Financials (+20.9%, -20.7%, +0.2%), Materials (+3.8%, -4.2%, -0.4%) , Consumer Discretionary (+11.9%, -14.6%, -2.8%), and Technology (+10.2%, -14.6%, -4.4%).
ProShares categorizes RALS as one of their two “Alpha” offerings – the other being ProShares Credit Suisse 130/30 (CSM) launched in July 2009.
Additional information is located in the RALS prospectus. Concurrent with the launch of the RALS, ProShares is introducing a new marketing campaign with the tag line, “The Alternative ETF Company.”
Disclosure covering writer, editor, and publisher: Long AAPL and SLB. No positions in any of the ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.